MHI (JP 7011): Declining Orders and Widening Aircraft Loss Could Miss Guidance

Leading Independent Investment Research, Morningstar, Inc.

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Equity Bottom-Up

Mitsubishi Heavy Industries / Equity Bottom-Up

A transfer of coverage for <a href="https://www.smartkarma.com/entities/13613" target="_blank" data-smartkarma-citation="entities:13613:1">Mitsubishi Heavy Industries (7011 JP)</a>, or MHI, sees us lift our fair value estimate to JPY 504 from JPY 450 as we adjust our medium-term assumptions on its profit margins slightly higher to 6.8% from 6.3%, reflecting some success in meeting its efficiency targets. MHI’s operating margins lag its global peers in the power turbines and defense industries due to its higher cost base and a lack of scale in the latter. In this regard, we think management’s focus on right-sizing core businesses, consolidating operations, and improving efficiency is correctly emphasized. Although we think some of MHI’s products and services may be moaty, the lower profitability means that MHI’s returns on invested capital have hovered around 5%-7%, below its estimated weighted cost of capital at 7.0%. In this regard, we have maintained our no-moat rating on the company. Moreover, its conventional thermal power turbine business could remain lackluster for longer, given the shift toward renewables.With MHI trading at 0.8 times price/book presently, we think the company is fairly valued, albeit not expensive. Other conglomerates in our coverage are trading at similar levels.Analyst: Lorraine Tan

A transfer of coverage for Mitsubishi Heavy Industries (7011 JP), or MHI, sees us lift our fair value estimate to JPY 504 from JPY 450 as we adjust our medium-term assumptions on its profit margins slightly higher to 6.8% from 6.3%, reflecting some success in meeting its efficiency targets. MHI’s operating margins lag its global peers in the power turbines and defense industries due to its higher cost base and a lack of scale in the latter. In this regard, we think management’s focus on right-sizing core businesses, consolidating operations, and improving efficiency is correctly emphasized. Although we think some of MHI’s products and services may be moaty, the lower profitability means that MHI’s returns on invested capital have hovered around 5%-7%, below its estimated weighted cost of capital at 7.0%. In this regard, we have maintained our no-moat rating on the company. Moreover, its conventional thermal power turbine business could remain lackluster for longer, given the shift toward renewables.With MHI trading at 0.8 times price/book presently, we think the company is fairly valued, albeit not expensive. Other conglomerates in our coverage are trading at similar levels.Analyst: Lorraine Tan

Reinitiating Coverage of Mitsubishi Heavy Industries With a Higher FVE of JPY 504; 1Q Results Mixed